What is an Insolvent Estate in Illinois?

If someone dies in Illinois, and his/her debts exceed the value of his/her estate assets, then the deceased person has what is called an "insolvent estate".  So, what should you do if your loved one died with an insolvent estate in Illinois?  Let's take a look at the various issues related to insolvent estates to find out.


How should I deal with an insolvent estate?


If you are the person most likely to serve as the representative of a deceased person's insolvent estate, there are a couple of options available to you.  First, you could simply walk away from the estate and do nothing.  This option would make sense if there is very little value in the assets of the estate.  However, you could also go through the Probate court process to resolve the estate.  This option makes the most sense if the estate does have some value, but just not enough to pay all of the debts.  To better understand these scenarios, let's see this play out in two different illustrations.


In illustration A, imagine that you have a loved one who passed away with $1,000.00 in the bank in his/her name only, rented an apartment, had no car, and had no other assets of any real value.  In this illustration, your loved one has $75,000.00 in medical bills.  To handle this estate, some might suggest using a Small Estate Affidavit to gain access to the bank account, and then to walk away from all of the creditors while pocketing the money.  This wouldn't work because a Small Estate Affidavit requires that all valid claims against the estate be paid before any distribution is made to any heir or legatee.  If, on the other hand, you were to probate the estate in court, it would cost several thousand dollars in attorney's fees, court costs, and related estate expenses, and there would only be $1,000.00 to pay the expenses.  Thus, it is advisable to simply walk away from this kind of insolvent estate.


In illustration B, though, imagine the same scenario above, except instead of $1,000.00 in the bank, your loved one has $50,000.00 in the bank.  In this illustration, there is still not enough to pay all of the debts of the estate, but there is definitely enough to resolve the estate through a Probate court process. Essentially, by probating the estate in court, you will be able to gain access to the $50,000.00, pay the attorney's fees, court costs, funeral expenses, pay yourself an Administrator or Executor fee (which could range from $2,500.00 to $10,000.00 or more in a case like this), and then use the remainder to make partial satisfaction to the creditors of the estate.  Thus, the estate is resolved, and you are compensated for your time in handling the estate.


Probate Court Process for Insolvent Estates


If a Probate court process is deemed to be the best way to resolve an insolvent estate, then there are a few unique aspects to examine, as follows:


Notice to Creditors of the Estate's Insolvency


In addition to the normal six-month "claims publication" that is done for unknown creditors in any Illinois Probate proceeding, the representative in an insolvent estate will also need to mail a court notice to all known creditors of the estate, informing them of the estate's insolvency.  This notice is typically done near the end of the estate when all assets have been collected and appraised, and all debts have been determined.  In the notice to creditors, the representative of the estate will need to include a basic accounting showing the assets of the estate, the debts of the estate, and the proposed distributions (if any) to the creditors.


Priority of Claims against the Estate


As we have seen above, there are various expenses of the estate that trump typical creditors' claims in an estate.  First, expenses related to estate administration and funeral expenses are paid before anything else.  With estate administration expenses, this includes attorneys' fees, Executor/Administrator fees, expenses of the Executor/Administrator in the administration process, court costs, etc.  Next, there is a statutory pecking order outlined in 755 ILCS 5/18-10 to determine who gets paid thereafter, as follows:  


  1st: Funeral and burial expenses, expenses of administration, and statutory custodial claims. For the purposes of this paragraph, funeral and burial expenses paid by any person, including a surviving spouse, are funeral and burial expenses; and funeral and burial expenses include reasonable amounts paid for a burial space, crypt or niche, a marker on the burial space, care of the burial space, crypt or niche, and interest on these amounts. Interest on these amounts shall accrue beginning 60 days after issuance of letters of office to the representative of the decedent's estate, or if no such letters of office are issued, then beginning 60 days after those amounts are due, up to the rate of 9% per annum as allowed by contract or law.
    2nd: The surviving spouse's or child's award.
    3rd: Debts due the United States.
    4th: Money due employees of the decedent of not more than $800 for each claimant for services rendered within 4 months prior to the decedent's death and expenses attending the last illness.
    5th: Money and property received or held in trust by decedent which cannot be identified or traced.
    6th: Debts due this State and any county, township, city, town, village or school district located within this State.
    7th: All other claims. 


Thus, under this statutory outline, the claims for medical expenses in our illustrations above would fall under 7th class claims, listed as "All other claims".


Closing the Insolvent Probate Estate


Finally, once all funds have been distributed to the creditors according to their respective priorities under Illinois law, the estate will be ready to be closed.  The Final Report of the representative should be filed with the court, and a final notice will need to be given to all interested parties (heirs, legatees, creditors, etc.) notifying them that they have 42 days from the date of filing the Final Report to make objections to the estate administration (755 ILCS 5/28-11e).  Since most interested parties typically want nothing to do with an insolvent estate, the estate can be closed approximately two months after the final notice is sent. 


Do I inherit the debts of my relatives?


Oftentimes, creditors of an estate will begin harassing family members of the deceased person shortly after the death.  This leads many people to then ask the question:  “Am I responsible for my relative’s debts?”


In short, no, you are not responsible for your relative’s debts.  The typical reason that a person would be responsible for another person’s debts is if the surviving relative co-signed for the debts, or in some way guaranteed their payment.  Thus, if you have never agreed to satisfy the debts of a loved one in the event of his/her passing, then you are not responsible for the debts.  In addition, the creditors do not have a right to harass you about the debts, and you could have a cause of action against them if they do in fact harass you.


Case Study:  Son Left with Complicated Insolvent Estate after Father’s Death


When Bill’s father passed away in the west suburbs of Chicago, Bill didn’t know what to do.       Even though his father owned his own home and car, he left Bill and Bill’s brother with a             severely insolvent estate from various unpaid debts.  To make matters even worse, his father’s     home was in the process of being foreclosed on by the bank.  Bill contacted our office for help,   and hired us to assist him in resolving the plethora of issues with the estate.  After assessing the   situation, our firm proceeded to inventory the estate assets and debts, and formulate a plan to       settle the entire estate.  We effectively worked to discharge the debts of the estate through the       probate process, and even enabled Bill to be reimbursed for funeral expenses paid and to             receive professional-level compensation for his time with the estate.           


Contact our Firm


Our firm has helped many individuals with insolvent estates across the Chicagoland area, including in Kane, DuPage, Cook, Will, and Kendall Counties.  If you have questions regarding a Probate matter, complete the form below to set up a free initial consultation today!

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